As 2025 nears, financial advisors are preparing for the expiration of key provisions from the 2017 Tax Cuts and Jobs Act (TCJA), which will affect income, estate, and gift tax planning.
Some of the temporary provisions set to expire include lower federal income tax brackets, increased standard deductions, a more generous child tax credit, a 20% deduction for pass-through businesses, and higher estate and gift tax exemptions.
Here are some strategies advisors are considering:
Estate Planning Focus
The TCJA increased the lifetime estate and gift tax exemption, which currently stands at $13.61 million for individuals and $27.22 million for married couples in 2024.
However, this amount will be reduced by half after 2025 if Congress does not extend the provision. Advisors like Peter Traphagen Jr., a certified financial planner, are focusing on removing assets from estates during life through strategies like:
- Trusts: To transfer wealth tax-efficiently.
- Gifts to beneficiaries: Leveraging the gift tax exemption.
- 529 College Savings Plans: Funding education for future generations.
- Direct payments to institutions: For education or medical expenses.
If these strategies are implemented before 2026, assets removed from estates can avoid being taxed at the current maximum estate tax rate of 40%.
Accelerating Income
With federal income tax brackets set to revert to higher levels in 2026, many advisors are advising clients to accelerate income into the current lower brackets. Some strategies include:
- Roth IRA Conversions: To lock in today’s lower tax rates.
- Recognizing business income earlier: Especially for pass-through entities like sole proprietors, partnerships, or S corporations, who may want to maximize the 20% qualified business income (QBI) deduction before it potentially expires in 2026.
Deferring Deductions
The standard deduction is set to decrease after 2025. For 2024, it stands at $14,600 for single taxpayers and $29,200 for married couples filing jointly.
With a lower standard deduction after 2025, more taxpayers may opt to itemize deductions. Advisors like Samantha Pahlow are suggesting clients defer deductions, such as charitable contributions, to maximize tax benefits in future years when they are more likely to itemize.
By implementing these strategies, advisors hope to mitigate the impact of the “tax cliff” and maximize tax savings before the TCJA provisions expire.